Financial literacy has many definitions. One of our favourite ones is knowing how money works, and how you can put money to work for you. Others define it as how well one can understand budgeting, and apply financial prudence to life decisions.
In general, financial literacy refers to how well one can manage their financial resources effectively throughout their life, and how well they are able to plan for their financial goals.
Why Is Important for Us to Be Financially Literate?
Research studies across countries on financial literacy have shown that most individuals (including entrepreneurs) don’t understand the concept of compound interest and some consumers don’t actively seek out financial information before making financial decisions. Most financial consumers lack the ability to choose and manage a credit card efficiently, and lack of financial literacy education is responsible for lack of money management skills and financial planning for business and retirement.
Finances are an integral part of our life, and many of the decisions we make on a daily, monthly and yearly basis either affect our finances directly, or revolve around the subject of finances. The way we understand and approach finances can have a huge impact on the decisions we make in many areas small and large, from food and lifestyle choices, to career and family matters.
The consequences of good or bad decisions compound by the day. When the dimension of time is factored in, the good gets better and the bad gets worse. Good investment plans can gather handsome compounding interest, while uncurbed bad spending habits might do the exact opposite with debt and bills.
Being financially literate also helps us in preparing for the future like family planning and retirement, though they might not feel as important at present. There might also be times when we are caught unaware by circumstance, for example not being covered by insurance for hefty hospital bills. Decisions like these have to be made way beforehand, so it pays (literally) to be well prepared.
If you feel your financial literacy needs improvement, here’s an infographic we made with some tips to get you started!
In our next article, we will also go deeper into the main areas you should be mindful of to improve your financial literacy.
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